The Lowdown from Investment Quorum

January 21st, 2019

Global Markets to 21 January 2019 Highlights Global equity markets continue to rally for the fourth week in a row. The current US-China trade talks give further grounds for optimism. Risk assets are buoyed by the latest US Industrial production numbers and China&#39;s recently-unveiled stimulus measures. In the UK, emotion continues to run high among […]

Global Markets to 21 January 2019

Highlights

Global equity markets continue to rally for the fourth week in a row.

The current US-China trade talks give further grounds for optimism.

Risk assets are buoyed by the latest US Industrial production numbers and China&#39;s recently-unveiled stimulus measures.

In the UK, emotion continues to run high among voters and investors as the Brexit drama continues and there is further political upheaval.

Sterling rallies against the US dollar, while on the commodities markets a barrel of Brent crude oil nudges closer to US$63.0.

Can December be seen as when global stock markets bottomed out, with positive sentiment now returning?

Global Market Summary

Global equity markets have resumed their upward momentum after a wild sell-off in December. But perhaps more importantly, the January rally has so far been nice and steady, unlike December’s unpredictable flash crash. This is good news for long-term investors: they now have an opportunity to buy quality at cheaper prices.

December was characterised by stock markets responding nervously, overacting to global negative events. This resulted in many of them overshooting to the downside. The negative way in which global investors reacted was also quite normal – their ability to withstand such events really was put to the test.

But it is precisely for that reason that ignoring the unrelenting noise on the markets and in the media and doing nothing while everybody else falls prey to panic-selling is the best strategy. Indeed, periods of extreme global turmoil and severe fall-backs on the equity markets are usually a good time to take advantage of any price weakness and buy. That is not to say that you should throw caution to the wind: some assets are cheap for a reason.

There are concerns over the effects that the trade tariffs are having, but the US economy seems to be reacting in a somewhat nuanced way: some US corporations are pessimistic about the outcome, even though the recent US industrial production data gives grounds for optimism. Similarly, although the Chinese economy has suffered the most from the trade war, the country’s authorities have recently unveiled fresh stimulus measures to bolster its economy.

It would therefore seem that global equity markets have overreacted and priced in a great deal of bad news (which is what created the December malaise). It now appears likely that the US Federal Bank will only raise interest rates once this year and that Washington and Beijing will succeed in resolving some of their differences regarding trade and tariffs. Both of these outcomes could generate further upward momentum on the markets.

In the UK meanwhile, the ongoing Brexit drama being played out against a highly uncertain political backdrop continues to weigh heavily on the nation and the UK stock market. Prime Minister Theresa May has now survived two motions of no confidence and had a further confrontation with Labour leader Jeremy Corbyn.

The Prime Minister only survived Corbyn’s attempt to force a general election by relying on Northern Ireland’s Democratic Unionist party and then inviting opposition party leaders to join her in talks on how to resolve the Brexit deal deadlock.

However, this was seen by Mr Corbyn as an attempt to blackmail opposition parties into accepting a compromise plan against the threat of a no-deal Brexit. Ministers in the House also appear to be split on whether to back an extension to the Article 50 process under which Britain is supposed to leave the European Union on 29 March 2019.

Unfortunately, Brexit is unlikely to be resolved over the coming days (or even weeks). As Brexiteer cabinet minister Liam Fox told the BBC over the weekend, “you’ve got a Leave population and a Remain Parliament”. The country is in something of an impasse, and with so much indecision and uncertainty, there is every chance that a solution will not emerge until the eleventh hour.

As far as the UK stock market and sterling are concerned, both look relatively cheap – and for a very good reason: Brexit and its unknown outcome. Asset allocation data providers are showing that global investors are shunning UK-sited assets in favour of global exposure. In fact, investors are at their lowest UK exposure since the financial crisis of 2008-2009.

The result is that the January bounce that global equity markets have enjoyed has left the UK’s leading index, the FTSE 100, lagging behind the rest of the world. In contrast, a modest rise in the value of the pound this year has meant that the FTSE 250 and AIM indices have fared far better. If the UK Parliament were able to adopt a more united stance in its approach to managing Brexit, money flows could quickly return to the stock market and push it higher than its current levels.

So, did stock markets hit rock bottom in December? They may have done, but right across the world, we are still seeing a huge transformation in the forces that govern how we live and how our businesses are managed and run. Rapid technological developments – particularly in artificial intelligence and machine learning – are changing our way of life.

So when there are sharp sell-offs in markets and oversold positions, we as global investors have an opportunity to re-evaluate our portfolios and make sure that we have investment exposure towards the business landscape of the future – not the past. This is likely to generate the best total returns over the coming years.

Equally, investing in businesses that have strong balance sheets, cash flow and rising dividends has proven to be a winning formula over the long term. Whether or not December really was the bottom of the recent stock market correction is fairly irrelevant if you invest wisely and over the long term.

Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.

This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.

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